UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
______________________________
FORM 10-Q
______________________________
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the Quarterly Period Ended: June 30, 2018
Commission File Number 001-34506
______________________________
TWO HARBORS INVESTMENT CORP.
(Exact Name of Registrant as Specified in Its Charter)
|
| | |
Maryland | | 27-0312904 |
(State or Other Jurisdiction of Incorporation or Organization) | | (I.R.S. Employer Identification No.) |
|
| | |
575 Lexington Avenue, Suite 2930 New York, New York | | 10022 |
(Address of Principal Executive Offices) | | (Zip Code) |
(612) 629-2500
(Registrant’s Telephone Number, Including Area Code)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes x No o
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes x No o
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act. (Check one):
|
| | | |
Large accelerated filer x | | | Accelerated filer o |
Non-accelerated filer o | (Do not check if a smaller reporting company) | | Smaller reporting company o |
| | | Emerging growth company o |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes o No x
Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date.
As of August 7, 2018 there were 248,072,557 shares of outstanding common stock, par value $.01 per share, issued and outstanding.
TWO HARBORS INVESTMENT CORP.
INDEX
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| PART I - FINANCIAL INFORMATION | |
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| PART II - OTHER INFORMATION | |
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PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED BALANCE SHEETS (unaudited)
(in thousands, except share data)
|
| | | | | | | |
ASSETS | June 30, 2018 | | December 31, 2017 |
Available-for-sale securities, at fair value | $ | 19,293,354 |
| | $ | 21,220,819 |
|
Mortgage servicing rights, at fair value | 1,450,261 |
| | 1,086,717 |
|
Residential mortgage loans held-for-sale, at fair value | 28,813 |
| | 30,414 |
|
Cash and cash equivalents | 417,515 |
| | 419,159 |
|
Restricted cash | 564,705 |
| | 635,836 |
|
Accrued interest receivable | 61,108 |
| | 68,309 |
|
Due from counterparties | 35,385 |
| | 842,303 |
|
Derivative assets, at fair value | 257,917 |
| | 309,918 |
|
Other assets | 166,930 |
| | 175,838 |
|
Total Assets | $ | 22,275,988 |
| | $ | 24,789,313 |
|
LIABILITIES AND STOCKHOLDERS’ EQUITY | | | |
Liabilities | | | |
Repurchase agreements | $ | 17,205,823 |
| | $ | 19,451,207 |
|
Federal Home Loan Bank advances | 865,024 |
| | 1,215,024 |
|
Revolving credit facilities | 170,000 |
| | 20,000 |
|
Convertible senior notes | 283,268 |
| | 282,827 |
|
Derivative liabilities, at fair value | 39,429 |
| | 31,903 |
|
Due to counterparties | 25,957 |
| | 88,898 |
|
Dividends payable | 96,219 |
| | 12,552 |
|
Accrued interest payable | 84,296 |
| | 87,698 |
|
Other liabilities | 25,727 |
| | 27,780 |
|
Total Liabilities | 18,795,743 |
| | 21,217,889 |
|
Stockholders’ Equity | | | |
Preferred stock, par value $0.01 per share; 50,000,000 shares authorized: | | | |
8.125% Series A cumulative redeemable: 5,750,000 and 5,750,000 shares issued and outstanding, respectively ($143,750 liquidation preference) | 138,872 |
| | 138,872 |
|
7.625% Series B cumulative redeemable: 11,500,000 and 11,500,000 shares issued and outstanding, respectively ($287,500 liquidation preference) | 278,094 |
| | 278,094 |
|
7.25% Series C cumulative redeemable: 11,800,000 and 11,800,000 shares issued and outstanding, respectively ($295,000 liquidation preference) | 285,584 |
| | 285,571 |
|
Common stock, par value $0.01 per share; 450,000,000 shares authorized and 175,470,398 and 174,496,587 shares issued and outstanding, respectively | 1,755 |
| | 1,745 |
|
Additional paid-in capital | 3,678,586 |
| | 3,672,003 |
|
Accumulated other comprehensive (loss) income | (34,933 | ) | | 334,813 |
|
Cumulative earnings | 2,850,985 |
| | 2,386,604 |
|
Cumulative distributions to stockholders | (3,718,698 | ) | | (3,526,278 | ) |
Total Stockholders’ Equity | 3,480,245 |
| | 3,571,424 |
|
Total Liabilities and Stockholders’ Equity | $ | 22,275,988 |
| | $ | 24,789,313 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited)
(in thousands, except share data)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Interest income: | | | | | |
Available-for-sale securities | $ | 183,467 |
| | $ | 149,910 |
| | $ | 374,183 |
| | $ | 285,237 |
|
Residential mortgage loans held-for-investment in securitization trusts | — |
| | 30,826 |
| | — |
| | 62,454 |
|
Residential mortgage loans held-for-sale | 349 |
| | 503 |
| | 656 |
| | 901 |
|
Other | 3,544 |
| | 3,502 |
| | 6,540 |
| | 5,303 |
|
Total interest income | 187,360 |
| | 184,741 |
| | 381,379 |
| | 353,895 |
|
Interest expense: | | | | | | | |
Repurchase agreements | 97,812 |
| | 43,806 |
| | 184,392 |
| | 76,062 |
|
Collateralized borrowings in securitization trusts | — |
| | 24,843 |
| | — |
| | 50,229 |
|
Federal Home Loan Bank advances | 4,896 |
| | 11,444 |
| | 9,354 |
| | 20,237 |
|
Revolving credit facilities | 999 |
| | 597 |
| | 1,803 |
| | 1,026 |
|
Convertible senior notes | 4,707 |
| | 4,591 |
| | 9,425 |
| | 8,412 |
|
Total interest expense | 108,414 |
| | 85,281 |
| | 204,974 |
| | 155,966 |
|
Net interest income | 78,946 |
| | 99,460 |
| | 176,405 |
| | 197,929 |
|
Other-than-temporary impairments: | | | | |
| |
|
Total other-than-temporary impairment losses | (174 | ) | | (429 | ) | | (268 | ) | | (429 | ) |
Other income (loss): | | | | | | | |
(Loss) gain on investment securities | (31,882 | ) | | 31,249 |
| | (52,553 | ) | | (21,103 | ) |
Servicing income | 77,665 |
| | 51,308 |
| | 148,855 |
| | 91,081 |
|
Gain (loss) on servicing asset | 9,853 |
| | (46,630 | ) | | 81,660 |
| | (61,195 | ) |
Gain (loss) on interest rate swap and swaption agreements | 29,133 |
| | (76,710 | ) | | 179,678 |
| | (66,783 | ) |
Gain (loss) on other derivative instruments | 7,675 |
| | (19,540 | ) | | 15,728 |
| | (47,404 | ) |
Other income | 730 |
| | 3,126 |
| | 1,788 |
| | 12,622 |
|
Total other income (loss) | 93,174 |
| | (57,197 | ) | | 375,156 |
| | (92,782 | ) |
Expenses: | | | | | | | |
Management fees | 11,453 |
| | 9,847 |
| | 23,161 |
| | 19,655 |
|
Servicing expenses | 11,539 |
| | 11,296 |
| | 26,093 |
| | 16,594 |
|
Other operating expenses | 15,515 |
| | 17,471 |
| | 30,007 |
| | 31,235 |
|
Total expenses | 38,507 |
| | 38,614 |
| | 79,261 |
| | 67,484 |
|
Income from continuing operations before income taxes | 133,439 |
| | 3,220 |
| | 472,032 |
| | 37,234 |
|
(Benefit from) provision for income taxes | (6,051 | ) | | 8,759 |
| | (2,267 | ) | | (15,758 | ) |
Net income (loss) from continuing operations | 139,490 |
| | (5,539 | ) | | 474,299 |
| | 52,992 |
|
Income from discontinued operations, net of tax | — |
| | 14,197 |
| | — |
| | 27,651 |
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Net income | 139,490 |
| | 8,658 |
| | 474,299 |
| | 80,643 |
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Income from discontinued operations attributable to noncontrolling interest | — |
| | 40 |
| | — |
| | 40 |
|
Net income attributable to Two Harbors Investment Corp. | 139,490 |
| | 8,618 |
| | 474,299 |
| | 80,603 |
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Dividends on preferred stock | 13,747 |
| | 4,285 |
| | 27,494 |
| | 4,285 |
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Net income attributable to common stockholders | $ | 125,743 |
| | $ | 4,333 |
| | $ | 446,805 |
| | $ | 76,318 |
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The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (unaudited), continued
(in thousands, except share data)
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| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
| 2018 | | 2017 | | 2018 | | 2017 |
Basic earnings per weighted average common share: | | | | | | | |
Continuing operations | $ | 0.72 |
| | $ | (0.06 | ) | | $ | 2.55 |
| | $ | 0.28 |
|
Discontinued operations | — |
| | 0.08 |
| | — |
| | 0.16 |
|
Net income | $ | 0.72 |
| | $ | 0.02 |
| | $ | 2.55 |
| | $ | 0.44 |
|
Diluted earnings per weighted average common share: | | | | | | | |
Continuing operations | $ | 0.68 |
| | $ | (0.06 | ) | | $ | 2.36 |
| | $ | 0.28 |
|
Discontinued operations | — |
| | 0.08 |
| | — |
| | 0.16 |
|
Net income | $ | 0.68 |
| | $ | 0.02 |
| | $ | 2.36 |
| | $ | 0.44 |
|
Dividends declared per common share | $ | 0.47 |
| | $ | 0.52 |
| | $ | 0.94 |
| | $ | 1.02 |
|
Weighted average number of shares of common stock: | | | | | | | |
Basic | 175,451,989 |
| | 174,473,168 |
| | 175,299,822 |
| | 174,378,095 |
|
Diluted | 193,212,877 |
| | 174,473,168 |
| | 193,016,793 |
| | 174,378,095 |
|
Comprehensive income: | | | | | | | |
Net income | $ | 139,490 |
| | $ | 8,658 |
| | $ | 474,299 |
| | $ | 80,643 |
|
Other comprehensive (loss) income, net of tax: | | | | | | | |
Unrealized (loss) gain on available-for-sale securities | (34,887 | ) | | 81,628 |
| | (379,664 | ) | | 155,390 |
|
Other comprehensive (loss) income | (34,887 | ) | | 81,628 |
| | (379,664 | ) | | 155,390 |
|
Comprehensive income | 104,603 |
| | 90,286 |
| | 94,635 |
| | 236,033 |
|
Comprehensive income attributable to noncontrolling interest | — |
| | 42 |
| | — |
| | 42 |
|
Comprehensive income attributable to Two Harbors Investment Corp. | 104,603 |
| | 90,244 |
| | 94,635 |
| | 235,991 |
|
Dividends on preferred stock | 13,747 |
| | 4,285 |
| | 27,494 |
| | 4,285 |
|
Comprehensive income attributable to common stockholders | $ | 90,856 |
| | $ | 85,959 |
| | $ | 67,141 |
| | $ | 231,706 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY (unaudited)
(in thousands, except share data)
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| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| Series A Preferred Stock | | Series B Preferred Stock | | Series C Preferred Stock | | Common Stock Par Value | | Additional Paid-in Capital | | Accumulated Other Comprehensive Income (Loss) | | Cumulative Earnings | | Cumulative Distributions to Stockholders | | Total Stockholders’ Equity | | Non- controlling Interest | | Total Equity |
Balance, December 31, 2016 | $ | — |
| | $ | — |
| | $ | — |
| | $ | 1,739 |
| | $ | 3,661,711 |
| | $ | 199,227 |
| | $ | 2,038,033 |
| | $ | (2,499,599 | ) | | $ | 3,401,111 |
| | $ | — |
| | $ | 3,401,111 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 80,603 |
| | — |
| | 80,603 |
| | 40 |
| | 80,643 |
|
Other comprehensive income before reclassifications, net of tax expense of $27,014 | — |
| | — |
| | — |
| | — |
| | — |
| | 151,789 |
| | — |
| | — |
| | 151,789 |
| | 2 |
| | 151,791 |
|
Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $2,722 | — |
| | — |
| | — |
| | — |
| | — |
| | 3,595 |
| | — |
| | — |
| | 3,595 |
| | — |
| | 3,595 |
|
Other comprehensive income, net of tax expense of $24,292 | — |
| | — |
| | — |
| | — |
| | — |
| | 155,384 |
| | — |
| | — |
| | 155,384 |
| | 2 |
| | 155,386 |
|
Contribution of TH Commercial Holdings LLC to Granite Point | — |
| | — |
| | — |
| | — |
| | (13,777 | ) | | 6 |
| | — |
| | — |
| | (13,771 | ) | | 195,646 |
| | 181,875 |
|
Issuance of preferred stock, net of offering costs | 138,872 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 138,872 |
| | — |
| | 138,872 |
|
Issuance of common stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | 256 |
| | — |
| | — |
| | — |
| | 256 |
| | — |
| | 256 |
|
Preferred dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (4,285 | ) | | (4,285 | ) | | — |
| | (4,285 | ) |
Common dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (177,963 | ) | | (177,963 | ) | | — |
| | (177,963 | ) |
Non-cash equity award compensation | — |
| | — |
| | — |
| | 7 |
| | 8,207 |
| | — |
| | — |
| | — |
| | 8,214 |
| | — |
| | 8,214 |
|
Balance, June 30, 2017 | $ | 138,872 |
| | $ | — |
| | $ | — |
| | $ | 1,745 |
| | $ | 3,656,398 |
| | $ | 354,617 |
| | $ | 2,118,636 |
| | $ | (2,681,847 | ) | | $ | 3,588,421 |
| | $ | 195,688 |
| | $ | 3,784,109 |
|
| | | | | | | | | | | | | | | | |
|
| | | | |
Balance, December 31, 2017 | $ | 138,872 |
| | $ | 278,094 |
| | $ | 285,571 |
| | $ | 1,745 |
| | $ | 3,672,003 |
| | $ | 334,813 |
| | $ | 2,386,604 |
| | $ | (3,526,278 | ) | | $ | 3,571,424 |
| | $ | — |
| | $ | 3,571,424 |
|
Cumulative effect of adoption of new accounting principle | — |
| | — |
| | — |
| | — |
| | — |
| | 9,918 |
| | (9,918 | ) | | — |
| | — |
| | — |
| | — |
|
Adjusted balance, January 1, 2018 | 138,872 |
| | 278,094 |
| | 285,571 |
| | 1,745 |
| | 3,672,003 |
| | 344,731 |
| | 2,376,686 |
| | (3,526,278 | ) | | 3,571,424 |
| | — |
| | 3,571,424 |
|
Net income | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 474,299 |
| | — |
| | 474,299 |
| | — |
| | 474,299 |
|
Other comprehensive loss before reclassifications, net of tax benefit of $658 | — |
| | — |
| | — |
| | — |
| | — |
| | (402,218 | ) | | — |
| | — |
| | (402,218 | ) | | — |
| | (402,218 | ) |
Amounts reclassified from accumulated other comprehensive income, net of tax benefit of $0 | — |
| | — |
| | — |
| | — |
| | — |
| | 22,554 |
| | — |
| | — |
| | 22,554 |
| | — |
| | 22,554 |
|
Other comprehensive loss, net of tax benefit of $658 | — |
| | — |
| | — |
| | — |
| | — |
| | (379,664 | ) | | — |
| | — |
| | (379,664 | ) | | — |
| | (379,664 | ) |
Issuance of preferred stock, net of offering costs | — |
| | — |
| | 13 |
| | — |
| | — |
| | — |
| | — |
| | — |
| | 13 |
| | — |
| | 13 |
|
Issuance of common stock, net of offering costs | — |
| | — |
| | — |
| | — |
| | 195 |
| | — |
| | — |
| | — |
| | 195 |
| | — |
| | 195 |
|
Preferred dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (27,494 | ) | | (27,494 | ) | | — |
| | (27,494 | ) |
Common dividends declared | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | — |
| | (164,926 | ) | | (164,926 | ) | | — |
| | (164,926 | ) |
Non-cash equity award compensation | — |
| | — |
| | — |
| | 10 |
| | 6,388 |
| | — |
| | — |
| | — |
| | 6,398 |
| | — |
| | 6,398 |
|
Balance, June 30, 2018 | $ | 138,872 |
| | $ | 278,094 |
| | $ | 285,584 |
| | $ | 1,755 |
| | $ | 3,678,586 |
| | $ | (34,933 | ) | | $ | 2,850,985 |
| | $ | (3,718,698 | ) | | $ | 3,480,245 |
| | $ | — |
| | $ | 3,480,245 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited)
(in thousands)
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2017 |
Cash Flows From Operating Activities: | | | |
Net income from continuing operations | $ | 474,299 |
| | $ | 52,992 |
|
Adjustments to reconcile net income from continuing operations to net cash provided by operating activities: | | | |
Amortization of premiums and discounts on investment securities, net | 44,891 |
| | 23,293 |
|
Amortization of deferred debt issuance costs on convertible senior notes | 441 |
| | 176 |
|
Other-than-temporary impairment losses | 268 |
| | 429 |
|
Realized and unrealized losses on investment securities | 53,846 |
| | 21,103 |
|
(Gain) loss on servicing asset | (81,660 | ) | | 61,195 |
|
Gain on residential mortgage loans held-for-sale | (556 | ) | | (1,794 | ) |
Gain on residential mortgage loans held-for-investment and collateralized borrowings in securitization trusts | — |
| | (8,077 | ) |
Realized and unrealized (gain) loss on interest rate swaps and swaptions | (162,029 | ) | | 56,305 |
|
Unrealized loss on other derivative instruments | 22,040 |
| | 35,111 |
|
Equity based compensation | 6,398 |
| | 8,214 |
|
Depreciation of fixed assets | 348 |
| | 550 |
|
Purchases of residential mortgage loans held-for-sale | — |
| | (567 | ) |
Proceeds from sales of residential mortgage loans held-for-sale | — |
| | 3,708 |
|
Proceeds from repayment of residential mortgage loans held-for-sale | 1,754 |
| | 4,532 |
|
Net change in assets and liabilities: |
|
| | |
Decrease (increase) in accrued interest receivable | 7,201 |
| | (10,217 | ) |
Increase in deferred income taxes, net | (1,954 | ) | | (16,078 | ) |
(Increase) decrease in income taxes receivable | (316 | ) | | 80 |
|
Increase in prepaid and fixed assets | (143 | ) | | (253 | ) |
(Increase) decrease in other receivables | (2,267 | ) | | 4,637 |
|
Decrease in servicing advances | 2,332 |
| | 5,031 |
|
(Decrease) increase in accrued interest payable | (3,402 | ) | | 25,797 |
|
Increase in income taxes payable | — |
| | 51 |
|
Decrease in accrued expenses and other liabilities | (2,053 | ) | | (6,695 | ) |
Net cash provided by operating activities of discontinued operations | — |
| | 16,838 |
|
Net cash provided by operating activities | $ | 359,438 |
| | $ | 276,361 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
(in thousands)
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2017 |
Cash Flows From Investing Activities: | | | |
Purchases of available-for-sale securities | $ | (3,221,949 | ) | | $ | (8,883,595 | ) |
Proceeds from sales of available-for-sale securities | 3,719,959 |
| | 5,092,318 |
|
Principal payments on available-for-sale securities | 949,116 |
| | 627,277 |
|
Purchases of mortgage servicing rights, net of purchase price adjustments | (282,283 | ) | | (266,003 | ) |
Proceeds from sales of mortgage servicing rights | 399 |
| | 627 |
|
(Purchases) short sales of derivative instruments, net | (78,944 | ) | | (33,562 | ) |
Proceeds from sales and settlement (payments for termination and settlement) of derivative instruments, net | 278,460 |
| | 15,905 |
|
Proceeds from repayment of residential mortgage loans held-for-investment in securitization trusts | — |
| | 181,806 |
|
Redemptions of Federal Home Loan Bank stock | 12,981 |
| | 33,080 |
|
Increase (decrease) in due to counterparties, net | 743,977 |
| | (54,152 | ) |
Net cash used in investing activities of discontinued operations | — |
| | (366,204 | ) |
Net cash provided by (used in) investing activities | 2,121,716 |
| | (3,652,503 | ) |
Cash Flows From Financing Activities: | | | |
Proceeds from repurchase agreements | 64,622,311 |
| | 78,592,898 |
|
Principal payments on repurchase agreements | (66,867,695 | ) | | (74,781,325 | ) |
Principal payments on collateralized borrowings in securitization trusts | — |
| | (179,717 | ) |
Principal payments on Federal Home Loan Bank advances | (350,000 | ) | | (761,238 | ) |
Proceeds from revolving credit facilities | 170,000 |
| | 74,000 |
|
Principal payments on revolving credit facilities | (20,000 | ) | | (104,000 | ) |
Proceeds from convertible senior notes | — |
| | 282,469 |
|
Proceeds from issuance of preferred stock, net of offering costs | 13 |
| | 138,872 |
|
Proceeds from issuance of common stock, net of offering costs | 195 |
| | 256 |
|
Dividends paid on preferred stock | (25,696 | ) | | — |
|
Dividends paid on common stock | (83,057 | ) | | (170,665 | ) |
Net cash provided by financing activities of discontinued operations | — |
| | 370,832 |
|
Net cash (used in) provided by financing activities | (2,553,929 | ) | | 3,462,382 |
|
Net (decrease) increase in cash, cash equivalents and restricted cash | (72,775 | ) | | 86,240 |
|
Cash, cash equivalents and restricted cash of continuing operations at beginning of period | 1,054,995 |
| | 758,916 |
|
Cash, cash equivalents and restricted cash of discontinued operations at beginning of period | — |
| | 56,279 |
|
Cash, cash equivalents and restricted cash at beginning of period | 1,054,995 |
| | 815,195 |
|
Cash, cash equivalents and restricted cash at end of period | $ | 982,220 |
| | $ | 901,435 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (unaudited), continued
(in thousands)
|
| | | | | | | |
| Six Months Ended |
| June 30, |
| 2018 | | 2017 |
Supplemental Disclosure of Cash Flow Information: | |
Cash paid for interest | $ | 208,377 |
| | $ | 89,296 |
|
Cash paid for taxes | $ | 3 |
| | $ | 192 |
|
Noncash Activities: | | | |
Transfers of residential mortgage loans held-for-sale to other receivables for foreclosed government-guaranteed loans | $ | 403 |
| | $ | 2,292 |
|
Transfer of fair value of mortgage servicing rights to fair value of Ginnie Mae residential mortgage loans held-for-sale upon buyout | $ | — |
| | $ | 9 |
|
Additions to mortgage servicing rights due to sale of residential mortgage loans held-for-sale | $ | — |
| | $ | 20 |
|
Cumulative-effect adjustment for adoption of new accounting principle | $ | 9,918 |
| | $ | — |
|
Dividends declared but not paid at end of period | $ | 96,219 |
| | $ | 95,049 |
|
Reconciliation of residential mortgage loans held-for-sale: | | | |
Residential mortgage loans held-for-sale at beginning of period | $ | 30,414 |
| | $ | 40,146 |
|
Purchases of residential mortgage loans held-for-sale | — |
| | 567 |
|
Transfers to other receivables for foreclosed government-guaranteed loans | (403 | ) | | (2,292 | ) |
Transfer of fair value of mortgage servicing rights to fair value of Ginnie Mae residential mortgage loans held-for-sale upon buyout | — |
| | (9 | ) |
Proceeds from sales of residential mortgage loans held-for-sale | — |
| | (3,708 | ) |
Proceeds from repayment of residential mortgage loans held-for-sale | (1,754 | ) | | (4,532 | ) |
Realized and unrealized gains on residential mortgage loans held-for-sale | 556 |
| | 1,774 |
|
Residential mortgage loans held-for-sale at end of period | $ | 28,813 |
| | $ | 31,946 |
|
The accompanying notes are an integral part of these condensed consolidated financial statements.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 1. Organization and Operations
Two Harbors Investment Corp., or the Company, is a Maryland corporation investing in, financing and managing Agency residential mortgage-backed securities, or Agency RMBS, non-Agency securities, mortgage servicing rights, or MSR, and other financial assets. The Company’s Chief Investment Officer manages the investment portfolio as a whole and resources are allocated and financial performance is assessed on a consolidated basis. The Company is externally managed and advised by PRCM Advisers LLC, or PRCM Advisers, which is a subsidiary of Pine River Capital Management L.P., or Pine River. The Company’s common stock is listed on the NYSE under the symbol “TWO”.
The Company was incorporated on May 21, 2009, and commenced operations as a publicly traded company on October 28, 2009, upon completion of a merger with Capitol Acquisition Corp., or Capitol, which became a wholly owned indirect subsidiary of the Company as a result of the merger.
The Company has elected to be treated as a real estate investment trust, or REIT, as defined under the Internal Revenue Code of 1986, as amended, or the Code, for U.S. federal income tax purposes. As long as the Company continues to comply with a number of requirements under federal tax law and maintains its qualification as a REIT, the Company generally will not be subject to U.S. federal income taxes to the extent that the Company distributes its taxable income to its stockholders on an annual basis and does not engage in prohibited transactions. However, certain activities that the Company may perform may cause it to earn income which will not be qualifying income for REIT purposes. The Company has designated certain of its subsidiaries as taxable REIT subsidiaries, or TRSs, as defined in the Code, to engage in such activities.
On June 28, 2017, the Company completed the contribution of its portfolio of commercial real estate assets to Granite Point Mortgage Trust Inc., or Granite Point, a newly formed Maryland corporation intended to qualify as a REIT, externally managed and advised by Pine River, and focused on directly originating, investing in and managing senior commercial mortgage loans and other debt and debt-like commercial real estate investments. The Company contributed its equity interests in its wholly owned subsidiary, TH Commercial Holdings LLC, to Granite Point and, in exchange for its contribution, received approximately 33.1 million shares of common stock of Granite Point, which represented approximately 76.5% of the outstanding stock of Granite Point upon completion of the initial public offering, or IPO, of its common stock on June 28, 2017. On November 1, 2017, the Company distributed, on a pro rata basis, the 33.1 million shares of Granite Point common stock that it acquired in connection with the contribution to stockholders holding shares of Two Harbors common stock outstanding as of the close of business on October 20, 2017.
On April 26, 2018, the Company announced that it had entered into a definitive merger agreement pursuant to which the Company would acquire CYS Investments, Inc., or CYS, a Maryland corporation investing in primarily Agency RMBS and treated as a REIT for U.S. federal income tax purposes. The transaction was approved by the stockholders of both the Company and CYS on July 27, 2018, and the merger was completed on July 31, 2018, at which time CYS became a wholly owned subsidiary of the Company. In exchange for all of the shares of CYS common stock outstanding immediately prior to the effective time of the merger, the Company issued approximately 72.6 million new shares of common stock, as well as aggregate cash consideration of $15.0 million, to CYS common stockholders. In addition, the Company issued 3 million shares of newly classified Series D cumulative redeemable preferred stock and 8 million shares of newly classified Series E cumulative redeemable preferred stock in exchange for all shares of CYS’s Series A and Series B cumulative redeemable preferred stock outstanding prior to the effective time of the merger.
Note 2. Basis of Presentation and Significant Accounting Policies
Consolidation and Basis of Presentation
The interim unaudited condensed consolidated financial statements of the Company have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission, or SEC. Certain information and note disclosures normally included in financial statements prepared in accordance with U.S. generally accepted accounting principles, or U.S. GAAP, have been condensed or omitted according to such SEC rules and regulations. However, management believes that the disclosures included in these interim condensed consolidated financial statements are adequate to make the information presented not misleading.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The condensed consolidated financial statements of the Company include the accounts of all subsidiaries; inter-company accounts and transactions have been eliminated. Certain prior period amounts have been reclassified to conform to the current period presentation. All per share amounts, common shares outstanding and restricted shares for all prior periods presented have been adjusted on a retroactive basis to reflect the Company’s one-for-two reverse stock split effected on November 1, 2017 (refer to Note 17 - Stockholders’ Equity for additional information). The accompanying condensed consolidated financial statements should be read in conjunction with the financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2017. In the opinion of management, all normal and recurring adjustments necessary to present fairly the financial condition of the Company at June 30, 2018 and results of operations for all periods presented have been made. The results of operations for the three and six months ended June 30, 2018 should not be construed as indicative of the results to be expected for future periods or the full year.
Due to its controlling ownership interest in Granite Point through November 1, 2017, the Company consolidated Granite Point on its financial statements. Effective November 1, 2017 (the date the 33.1 million shares of Granite Point common stock were distributed to the Company’s common stockholders), the Company no longer has a controlling interest in Granite Point and, therefore, has deconsolidated Granite Point and its subsidiaries from its financial statements and reclassified all of Granite Point’s prior period assets, liabilities and results of operations to discontinued operations.
The Company retains debt securities and excess servicing rights purchased from securitization trusts sponsored by either third parties or the Company’s subsidiaries. The securitization trusts are considered variable interest entities, or VIEs, for financial reporting purposes and, thus, are reviewed for consolidation under the applicable consolidation guidance. Whenever the Company has both the power to direct the activities of a trust that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant, the Company consolidates the trust. During the majority of 2017, the Company retained the most subordinate security in each of the securitization trusts, which gave the Company the power to direct the activities of the trusts that most significantly impact the trusts’ performance and the obligation to absorb losses or the right to receive benefits of the securitization trusts that could be significant. As a result, the Company consolidated all of the securitization trusts on its condensed consolidated balance sheet. During the fourth quarter of 2017, the Company sold all of the retained subordinated securities thereby removing the Company’s power to direct the activities of the trusts and the obligation to absorb losses or the right to receive benefits of the securitization trusts. As a result, the securitization trusts are no longer consolidated on the Company’s condensed consolidated balance sheet and the remaining retained securities are included withing non-Agency available-for-sale, or AFS, securities.
Use of Estimates
The preparation of financial statements in conformity with U.S. GAAP requires management to make a number of significant estimates. These include estimates of fair value of certain assets and liabilities, amount and timing of credit losses, prepayment rates, the period of time during which the Company anticipates an increase in the fair values of real estate securities sufficient to recover unrealized losses in those securities, and other estimates that affect the reported amounts of certain assets and liabilities as of the date of the consolidated financial statements and the reported amounts of certain revenues and expenses during the reported period. It is likely that changes in these estimates (e.g., valuation changes due to supply and demand, credit performance, prepayments, interest rates, or other reasons) will occur in the near term. The Company’s estimates are inherently subjective in nature and actual results could differ from its estimates and the differences may be material.
Significant Accounting Policies
Included in Note 2 to the Consolidated Financial Statements of the Company’s 2017 Annual Report on Form 10-K is a summary of the Company’s significant accounting policies. Provided below is a summary of additional accounting policies that are significant to the Company’s consolidated financial condition and results of operations for the six months ended June 30, 2018.
Offsetting Assets and Liabilities
Certain of the Company’s repurchase agreements are governed by underlying agreements that provide for a right of setoff in the event of default by either party to the agreement. The Company also has netting arrangements in place with all derivative counterparties pursuant to standard documentation developed by the International Swap and Derivatives Association, or ISDA, or central clearing exchange agreements, in the case of centrally cleared interest rate swaps. The Company and the counterparty or clearing agency are required to post cash collateral based upon the net underlying market value of the Company’s open positions with the counterparty. Additionally, the Company’s centrally cleared interest rate swaps require that the Company posts an “initial margin” amount determined by the clearing exchange, which is generally intended to be set at a level sufficient to protect the exchange from the interest rate swap’s maximum estimated single-day price movement. The Company also exchanges “variation margin” based upon daily changes in fair value, as measured by the exchange.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Under U.S. GAAP, if the Company has a valid right of setoff, it may offset the related asset and liability and report the net amount. As a result of amendments to rules governing certain central clearing activities, the exchange of variation margin is considered a settlement of the interest rate swap, as opposed to pledged collateral. Accordingly, beginning in the first quarter of 2018 and in subsequent periods, the Company accounts for the receipt or payment of variation margin as a direct reduction to the carrying value of the interest rate swap asset or liability. The receipt or payment of initial margin will continue to be accounted for separate from the interest rate swap asset or liability. As of December 31, 2017, variation margin pledged or received was netted on a counterparty basis and classified within restricted cash, due from counterparties, or due to counterparties on the Company’s condensed consolidated balance sheets.
The Company presents repurchase agreements subject to master netting arrangements or similar agreements on a gross basis and derivative assets and liabilities (other than centrally cleared interest rate swaps) subject to such arrangements on a net basis, based on derivative type and counterparty, in its condensed consolidated balance sheets. Separately, the Company presents cash collateral subject to such arrangements (other than variation margin on centrally cleared interest rate swaps) on a net basis, based on counterparty, in its condensed consolidated balance sheets. However, the Company does not offset repurchase agreements or derivative assets and liabilities (other than centrally cleared interest rate swaps) with the associated cash collateral on its condensed consolidated balance sheets.
The following tables present information about the Company’s assets and liabilities that are subject to master netting arrangements or similar agreements and can potentially be offset on the Company’s condensed consolidated balance sheets as of June 30, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 |
| | | | | | | Gross Amounts Not Offset with Financial Assets (Liabilities) in the Consolidated Balance Sheets (1) | | |
(in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Assets (Liabilities) Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral (Received) Pledged | | Net Amount |
Assets | | | | | | | | | | | |
Derivative assets | $ | 520,557 |
| | $ | (262,640 | ) | | $ | 257,917 |
| | $ | (39,429 | ) | | $ | — |
| | $ | 218,488 |
|
Total Assets | $ | 520,557 |
| | $ | (262,640 | ) | | $ | 257,917 |
| | $ | (39,429 | ) | | $ | — |
| | $ | 218,488 |
|
Liabilities | | | | | | | | | | | |
Repurchase agreements | $ | (17,205,823 | ) | | $ | — |
| | $ | (17,205,823 | ) | | $ | 17,205,823 |
| | $ | — |
| | $ | — |
|
Derivative liabilities | (302,069 | ) | | 262,640 |
| | (39,429 | ) | | 39,429 |
| | — |
| | — |
|
Total Liabilities | $ | (17,507,892 | ) | | $ | 262,640 |
| | $ | (17,245,252 | ) | | $ | 17,245,252 |
| | $ | — |
| | $ | — |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
| | | | | | | Gross Amounts Not Offset with Financial Assets (Liabilities) in the Consolidated Balance Sheets (1) | | |
(in thousands) | Gross Amounts of Recognized Assets (Liabilities) | | Gross Amounts Offset in the Consolidated Balance Sheets | | Net Amounts of Assets (Liabilities) Presented in the Consolidated Balance Sheets | | Financial Instruments | | Cash Collateral (Received) Pledged | | Net Amount |
Assets | | | | | | | | | | | |
Derivative assets | $ | 340,576 |
| | $ | (30,658 | ) | | $ | 309,918 |
| | $ | (31,903 | ) | | $ | — |
| | $ | 278,015 |
|
Total Assets | $ | 340,576 |
| | $ | (30,658 | ) | | $ | 309,918 |
| | $ | (31,903 | ) | | $ | — |
| | $ | 278,015 |
|
Liabilities | | | | | | | | | | | |
Repurchase agreements | $ | (19,451,207 | ) | | $ | — |
| | $ | (19,451,207 | ) | | $ | 19,451,207 |
| | $ | — |
| | $ | — |
|
Derivative liabilities | (62,561 | ) | | 30,658 |
| | (31,903 | ) | | 31,903 |
| | — |
| | — |
|
Total Liabilities | $ | (19,513,768 | ) | | $ | 30,658 |
| | $ | (19,483,110 | ) | | $ | 19,483,110 |
| | $ | — |
| | $ | — |
|
____________________
| |
(1) | Amounts presented are limited in total to the net amount of assets or liabilities presented in the condensed consolidated balance sheets by instrument. Excess cash collateral or financial assets that are pledged to counterparties may exceed the financial liabilities subject to a master netting arrangement or similar agreement, or counterparties may have pledged excess cash collateral to the Company that exceed the corresponding financial assets. These excess amounts are excluded from the table above, although separately reported within restricted cash, due from counterparties, or due to counterparties in the Company’s condensed consolidated balance sheets. |
Recently Issued and/or Adopted Accounting Standards
Revenue from Contracts with Customers
In May 2014, the Financial Accounting Standards Board, or FASB, issued ASU No. 2014-09, which is a comprehensive revenue recognition standard that supersedes virtually all existing revenue guidance under U.S. GAAP. The standard’s core principle is that an entity will recognize revenue when it transfers promised goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled in exchange for those goods and services. As a result of the issuance of ASU No. 2015-14 in August 2015 deferring the effective date of ASU No. 2014-09 by one year, the ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption prohibited. The Company has evaluated the new guidance and determined that interest income, gains and losses on financial instruments and income from servicing residential mortgage loans are outside the scope of ASC 606, Revenues from Contracts with Customers, or ASC 606. For income from servicing residential mortgage loans, the Company considered that the FASB Transition Resource Group members generally agreed that an entity should look to ASC 860, Transfers and Servicing, to determine the appropriate accounting for these fees and ASC 606 contains a scope exception for contracts that fall under ASC 860. As a result, the adoption of this ASU did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.
Lease Classification and Accounting
In February 2016, the FASB issued ASU No. 2016-02, which requires lessees to recognize on their balance sheets both a lease liability for the obligation to make lease payments and a right-of-use asset for the right to use the underlying asset for the lease term. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. The Company has determined this ASU will not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Measurement of Credit Losses on Financial Instruments
In June 2016, the FASB issued ASU No. 2016-13, which changes the impairment model for most financial assets and certain other instruments. Valuation allowances for credit losses on AFS debt securities will be recognized, rather than direct reductions in the amortized cost of the investments, regardless of whether the impairment is considered to be other-than-temporary. The new model also requires the estimation of lifetime expected credit losses and corresponding recognition of allowance for losses on trade and other receivables, held-to-maturity debt securities, loans, and other instruments held at amortized cost. The ASU requires certain recurring disclosures and is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2019, with early adoption permitted for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018. The Company is evaluating the adoption of this ASU to determine the impact it may have on its condensed consolidated financial statements, which at the date of adoption, is expected to increase the allowance for credit losses with a resulting negative adjustment to retained earnings, with offsetting impacts to accumulated other comprehensive income.
Clarifying the Definition of a Business
In January 2017, the FASB issued ASU No. 2017-01, which changes the definition of a business to assist entities with evaluating when a set of transferred assets and activities is a business. The ASU requires an entity to evaluate if substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets; if so, the set of transferred assets and activities is not a business. The guidance also requires a business to include at least one substantive process and narrows the definition of outputs by more closely aligning it with how outputs are described in ASC 606. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2017, with early adoption permitted. The Company’s adoption of this ASU did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures, but will impact how the Company accounts for any future transfers of sets of assets and activities.
Reclassification of Certain Tax Effects from Accumulated Other Comprehensive Income
In February 2018, the FASB issued ASU No. 2018-02, which permits entities to reclassify tax effects stranded in accumulated other comprehensive income as a result of the Tax Cuts and Jobs Act, or TCJA, to retained earnings and requires entities to disclose whether or not they elected to reclassify the tax effects related to the TCJA as well as their policy for releasing income tax effects from accumulated other comprehensive income. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. Early adoption of this ASU was elected and applied by recording a cumulative-effect adjustment of $9.9 million to retained earnings, with the offsetting impact to accumulated other comprehensive income as of January 1, 2018.
Accounting for Share-Based Payments to Nonemployees
In June 2018, the FASB issued ASU No. 2018-07 to simplify the accounting for share-based payments to nonemployees by aligning it with the accounting for share-based payments to employees, with certain exceptions. Under the guidance, equity-classified nonemployee awards will be measured on and fixed at the grant date, rather than measured at fair value at each reporting date until the date at which the nonemployee’s performance is complete. The ASU is effective for annual periods, and interim periods within those annual periods, beginning on or after December 15, 2018, with early adoption permitted. Early adoption of this ASU was elected subsequent to quarter-end on July 1, 2018 and applied by recording a cumulative-effect adjustment to retained earnings as of January 1, 2018, which did not have a material impact on the Company’s financial condition, results of operations or financial statement disclosures.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
Note 3. Discontinued Operations
On June 28, 2017, the Company contributed its equity interests in its wholly owned subsidiary, TH Commercial Holdings LLC, to Granite Point and, in exchange for its contribution, received approximately 33.1 million shares of common stock of Granite Point, representing approximately 76.5% of the outstanding stock of Granite Point upon completion of the IPO of its common stock on June 28, 2017. On November 1, 2017, the Company distributed, on a pro rata basis, the 33.1 million shares of Granite Point common stock that it acquired in connection with the contribution to stockholders holding shares of Two Harbors common stock outstanding as of the close of business on October 20, 2017. Due to the Company’s controlling ownership interest in Granite Point through November 1, 2017, its results of operations and financial condition through such date reflect Granite Point’s commercial strategy, which includes as target assets first mortgages, mezzanine loans, B-notes and preferred equity. As of November 1, 2017, the Company no longer has a controlling interest in Granite Point and, therefore, has deconsolidated Granite Point and its subsidiaries from its financial statements and reclassified all of Granite Point’s prior period assets, liabilities and results of operations to discontinued operations. In accordance with ASC 845, Nonmonetary Transactions, the pro rata distribution of a consolidated subsidiary is recognized at carrying amount within stockholders’ equity. As a result, no gain or loss was recognized on the distribution.
Summarized financial information for the discontinued operations are presented below.
|
| | | |
(in thousands) | November 1, 2017 |
Assets: | |
Commercial real estate assets | $ | 2,233,080 |
|
Available-for-sale securities, at fair value | 12,814 |
|
Cash and cash equivalents | 84,183 |
|
Restricted cash | 2,838 |
|
Accrued interest receivable | 6,588 |
|
Other assets | 22,774 |
|
Total Assets | $ | 2,362,277 |
|
Liabilities: | |
Repurchase agreements | $ | 1,516,294 |
|
Dividends payable | 48 |
|
Other liabilities | 10,337 |
|
Total Liabilities | $ | 1,526,679 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
Interest income: | | | | | |
Commercial real estate assets | $ | — |
| | $ | 25,840 |
| | $ | — |
| | $ | 49,410 |
|
Available-for-sale securities | — |
| | 256 |
| | — |
| | 502 |
|
Other | — |
| | 4 |
| | — |
| | 6 |
|
Total interest income | — |
| | 26,100 |
| | — |
| | 49,918 |
|
Interest expense | — |
| | 7,773 |
| | — |
| | 13,879 |
|
Net interest income | — |
| | 18,327 |
| | — |
| | 36,039 |
|
Expenses: | | | | | | | |
Management fees | — |
| | 1,925 |
| | — |
| | 3,587 |
|
Servicing expenses | — |
| | 307 |
| | — |
| | 629 |
|
Other operating expenses | — |
| | 1,900 |
| | — |
| | 4,173 |
|
Total expenses | — |
| | 4,132 |
| | — |
| | 8,389 |
|
Income from discontinued operations before income taxes | — |
| | 14,195 |
| | — |
| | 27,650 |
|
Benefit from income taxes | — |
| | (2 | ) | | — |
| | (1 | ) |
Income from discontinued operations | — |
| | 14,197 |
| | — |
| | 27,651 |
|
Income from discontinued operations attributable to noncontrolling interest | — |
| | 40 |
| | — |
| | 40 |
|
Income from discontinued operations attributable to common stockholders | $ | — |
| | $ | 14,157 |
| | $ | — |
| | $ | 27,611 |
|
Note 4. Available-for-Sale Securities, at Fair Value
The Company holds AFS investment securities which are carried at fair value on the condensed consolidated balance sheets. The following table presents the Company’s AFS investment securities by collateral type as of June 30, 2018 and December 31, 2017:
|
| | | | | | | |
(in thousands) | June 30, 2018 | | December 31, 2017 |
Agency | | | |
Federal National Mortgage Association | $ | 12,102,934 |
| | $ | 13,920,721 |
|
Federal Home Loan Mortgage Corporation | 3,017,056 |
| | 3,616,967 |
|
Government National Mortgage Association | 669,001 |
| | 701,037 |
|
Non-Agency | 3,504,363 |
| | 2,982,094 |
|
Total available-for-sale securities | $ | 19,293,354 |
| | $ | 21,220,819 |
|
At June 30, 2018 and December 31, 2017, the Company pledged AFS securities with a carrying value of $19.0 billion and $21.0 billion, respectively, as collateral for repurchase agreements and advances from the Federal Home Loan Bank of Des Moines, or the FHLB. See Note 13 - Repurchase Agreements and Note 14 - Federal Home Loan Bank of Des Moines Advances.
At June 30, 2018 and December 31, 2017, the Company did not have any securities purchased from and financed with the same counterparty that did not meet the conditions of ASC 860, to be considered linked transactions and, therefore, classified as derivatives.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The Company is not required to consolidate VIEs for which it has concluded it does not have both the power to direct the activities of the VIEs that most significantly impact the entities’ performance, and the obligation to absorb losses or the right to receive benefits of the entities that could be significant. The Company’s investments in these unconsolidated VIEs include all non-Agency securities, which are classified within available-for-sale securities, at fair value on the condensed consolidated balance sheets. As of June 30, 2018 and December 31, 2017, the carrying value, which also represents the maximum exposure to loss, of all non-Agency securities in unconsolidated VIEs was $3.5 billion and $3.0 billion, respectively.
The following tables present the amortized cost and carrying value (which approximates fair value) of AFS securities by collateral type as of June 30, 2018 and December 31, 2017:
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| June 30, 2018 |
(in thousands) | Principal/ Current Face | | Un-amortized Premium | | Accretable Purchase Discount | | Credit Reserve Purchase Discount | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Carrying Value |
Agency | | | | | | | | | | | | | | | |
Principal and interest | $ | 15,178,924 |
| | $ | 960,177 |
| | $ | (24,315 | ) | | $ | — |
| | $ | 16,114,786 |
| | $ | 9,494 |
| | $ | (532,602 | ) | | $ | 15,591,678 |
|
Interest-only | 3,377,698 |
| | 229,293 |
| | — |
| | — |
| | 229,293 |
| | 15,728 |
| | (47,708 | ) | | 197,313 |
|
Total Agency | 18,556,622 |
| | 1,189,470 |
| | (24,315 | ) | | — |
| | 16,344,079 |
| | 25,222 |
| | (580,310 | ) | | 15,788,991 |
|
Non-Agency | | | | | | | | | | | | | | | |
Principal and interest | 4,470,380 |
| | 6,425 |
| | (664,948 | ) | | (923,834 | ) | | 2,888,023 |
| | 549,072 |
| | (7,707 | ) | | 3,429,388 |
|
Interest-only | 5,349,634 |
| | 73,708 |
| | — |
| | — |
| | 73,708 |
| | 3,843 |
| | (2,576 | ) | | 74,975 |
|
Total Non-Agency | 9,820,014 |
| | 80,133 |
| | (664,948 | ) | | (923,834 | ) | | 2,961,731 |
| | 552,915 |
| | (10,283 | ) | | 3,504,363 |
|
Total | $ | 28,376,636 |
| | $ | 1,269,603 |
| | $ | (689,263 | ) | | $ | (923,834 | ) | | $ | 19,305,810 |
| | $ | 578,137 |
| | $ | (590,593 | ) | | $ | 19,293,354 |
|
|
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| December 31, 2017 |
(in thousands) | Principal/ Current Face | | Un-amortized Premium | | Accretable Purchase Discount | | Credit Reserve Purchase Discount | | Amortized Cost | | Unrealized Gain | | Unrealized Loss | | Carrying Value |
Agency | | | | | | | | | | | | | | | |
Principal and interest | $ | 17,081,849 |
| | $ | 1,079,246 |
| | $ | (24,638 | ) | | $ | — |
| | $ | 18,136,457 |
| | $ | 42,149 |
| | $ | (134,969 | ) | | $ | 18,043,637 |
|
Interest-only | 2,941,772 |
| | 223,289 |
| | — |
| | — |
| | 223,289 |
| | 10,955 |
| | (39,156 | ) | | 195,088 |
|
Total Agency | 20,023,621 |
| | 1,302,535 |
| | (24,638 | ) | | — |
| | 18,359,746 |
| | 53,104 |
| | (174,125 | ) | | 18,238,725 |
|
Non-Agency | | | | | | | | | | | | | | | |
Principal and interest | 3,758,134 |
| | 2,757 |
| | (676,033 | ) | | (653,613 | ) | | 2,431,245 |
| | 488,931 |
| | (3,166 | ) | | 2,917,010 |
|
Interest-only | 5,614,925 |
| | 65,667 |
| | — |
| | — |
| | 65,667 |
| | 2,163 |
| | (2,746 | ) | | 65,084 |
|
Total Non-Agency | 9,373,059 |
| | 68,424 |
| | (676,033 | ) | | (653,613 | ) | | 2,496,912 |
| | 491,094 |
| | (5,912 | ) | | 2,982,094 |
|
Total | $ | 29,396,680 |
| | $ | 1,370,959 |
| | $ | (700,671 | ) | | $ | (653,613 | ) | | $ | 20,856,658 |
| | $ | 544,198 |
| | $ | (180,037 | ) | | $ | 21,220,819 |
|
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following tables present the carrying value of the Company’s AFS securities by rate type as of June 30, 2018 and December 31, 2017:
|
| | | | | | | | | | | |
| June 30, 2018 |
(in thousands) | Agency | | Non-Agency | | Total |
Adjustable Rate | $ | 20,611 |
| | $ | 3,175,732 |
| | $ | 3,196,343 |
|
Fixed Rate | 15,768,380 |
| | 328,631 |
| | 16,097,011 |
|
Total | $ | 15,788,991 |
| | $ | 3,504,363 |
| | $ | 19,293,354 |
|
|
| | | | | | | | | | | |
| December 31, 2017 |
(in thousands) | Agency | | Non-Agency | | Total |
Adjustable Rate | $ | 23,220 |
| | $ | 2,622,710 |
| | $ | 2,645,930 |
|
Fixed Rate | 18,215,505 |
| | 359,384 |
| | 18,574,889 |
|
Total | $ | 18,238,725 |
| | $ | 2,982,094 |
| | $ | 21,220,819 |
|
The following table presents the Company’s AFS securities according to their estimated weighted average life classifications as of June 30, 2018:
|
| | | | | | | | | | | |
| June 30, 2018 |
(in thousands) | Agency | | Non-Agency | | Total |
≤ 1 year | $ | 7,054 |
| | $ | 82,833 |
| | $ | 89,887 |
|
> 1 and ≤ 3 years | 39,666 |
| | 109,416 |
| | 149,082 |
|
> 3 and ≤ 5 years | 275,305 |
| | 410,861 |
| | 686,166 |
|
> 5 and ≤ 10 years | 12,156,899 |
| | 2,151,623 |
| | 14,308,522 |
|
> 10 years | 3,310,067 |
| | 749,630 |
| | 4,059,697 |
|
Total | $ | 15,788,991 |
| | $ | 3,504,363 |
| | $ | 19,293,354 |
|
When the Company purchases a credit-sensitive AFS security at a significant discount to its face value, the Company often does not amortize into income a significant portion of this discount that the Company is entitled to earn because the Company does not expect to collect the entire discount due to the inherent credit risk of the security. The Company may also record an other-than-temporary impairment, or OTTI, for a portion of its investment in the security to the extent the Company believes that the amortized cost will exceed the present value of expected future cash flows. The amount of principal that the Company does not amortize into income is designated as a credit reserve on the security, with unamortized net discounts or premiums amortized into income over time to the extent realizable.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
The following table presents the changes for the three and six months ended June 30, 2018 and 2017 of the net unamortized discount/premium and designated credit reserves on non-Agency AFS securities.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Six Months Ended June 30, |
| 2018 | | 2017 |
(in thousands) | Designated Credit Reserve | | Net Unamortized Discount/Premium | | Total | | Designated Credit Reserve | | Net Unamortized Discount/Premium | | Total |
Beginning balance at January 1 | $ | (653,613 | ) | | $ | (607,609 | ) | | $ | (1,261,222 | ) | | $ | (367,437 | ) | | $ | (623,440 | ) | | $ | (990,877 | ) |
Acquisitions | (310,985 | ) | | (14,025 | ) | | (325,010 | ) | | (100,558 | ) | | (78,796 | ) | | (179,354 | ) |
Accretion of net discount | — |
| | 44,611 |
| | 44,611 |
| | — |
| | 44,301 |
| | 44,301 |
|
Realized credit losses | 14,810 |
| | — |
| | 14,810 |
| | 8,424 |
| | — |
| | 8,424 |
|
Reclassification adjustment for other-than-temporary impairments | (268 | ) | | — |
| | (268 | ) | | (429 | ) | | — |
| | (429 | ) |
Transfers from (to) | 26,222 |
| | (26,222 | ) | | — |
| | 22,676 |
| | (22,676 | ) | | — |
|
Sales, calls, other | — |
| | 18,430 |
| | 18,430 |
| | 3,588 |
| | 52,063 |
| | 55,651 |
|
Ending balance at June 30 | $ | (923,834 | ) | | $ | (584,815 | ) | | $ | (1,508,649 | ) | | $ | (433,736 | ) | | $ | (628,548 | ) | | $ | (1,062,284 | ) |
The following table presents the components comprising the carrying value of AFS securities not deemed to be other than temporarily impaired by length of time that the securities had an unrealized loss position as of June 30, 2018 and December 31, 2017. At June 30, 2018, the Company held 1,464 AFS securities, of which 525 were in an unrealized loss position for less than twelve consecutive months and 228 were in an unrealized loss position for more than twelve consecutive months. At December 31, 2017, the Company held 1,435 AFS securities, of which 253 were in an unrealized loss position for less than twelve consecutive months and 234 were in an unrealized loss position for more than twelve consecutive months. Of the $13.5 billion and $12.2 billion of AFS securities in an unrealized loss position for less than twelve consecutive months as of June 30, 2018 and December 31, 2017, $13.1 billion, or 97.0%, and $12.0 billion, or 98.5%, respectively, were Agency AFS securities, whose principal and interest are guaranteed by the GSEs.
|
| | | | | | | | | | | | | | | | | | | | | | | |
| Unrealized Loss Position for |
| Less than 12 Months | | 12 Months or More | | Total |
(in thousands) | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses | | Estimated Fair Value | | Gross Unrealized Losses |
June 30, 2018 | $ | 13,496,177 |
| | $ | (404,135 | ) | | $ | 2,291,284 |
| | $ | (186,458 | ) | | $ | 15,787,461 |
| | $ | (590,593 | ) |
December 31, 2017 | $ | 12,198,870 |
| | $ | (65,313 | ) | | $ | 2,464,544 |
| | $ | (114,724 | ) | | $ | 14,663,414 |
| | $ | (180,037 | ) |
Evaluating AFS Securities for Other-Than-Temporary Impairments
In evaluating AFS securities for OTTI, the Company determines whether there has been a significant adverse quarterly change in the cash flow expectations for a security. The Company compares the amortized cost of each security in an unrealized loss position against the present value of expected future cash flows of the security. The Company also considers whether there has been a significant adverse change in the regulatory and/or economic environment as part of this analysis. If the amortized cost of the security is greater than the present value of expected future cash flows using the original yield as the discount rate, an other-than-temporary credit impairment has occurred. If the Company does not intend to sell and will not be more likely than not required to sell the security, the credit loss is recognized in earnings and the balance of the unrealized loss is recognized in either other comprehensive (loss) income, net of tax, or (loss) gain on investment securities, depending on the accounting treatment. If the Company intends to sell the security or will be more likely than not required to sell the security, the full unrealized loss is recognized in earnings.
TWO HARBORS INVESTMENT CORP.
Notes to the Condensed Consolidated Financial Statements (unaudited)
During the three and six months ended June 30, 2018, the Company recorded $0.2 million and $0.3 million in other-than-temporary credit impairments on a total of two non-Agency securities where the future expected cash flows for each security were less than its amortized cost. During both the three and six months ended June 30, 2017, the Company recorded $0.4 million in other-than-temporary credit impairments on one non-Agency security where its future expected cash flows were less than its amortized cost. As of June 30, 2018, impaired securities with a carrying value of $127.6 million had actual weighted average cumulative losses of 6.7%, weighted average three-month prepayment speed of 8.3%, weighted average 60+ day delinquency of 20.3% of the pool balance, and weighted average FICO score of 662. At June 30, 2018, the Company did not intend to sell the securities and determined that it was not more likely than not that the Company will be required to sell the securities; therefore, only the projected credit loss was recognized in earnings.
The following table presents the changes in OTTI included in earnings for the three and six months ended June 30, 2018 and 2017:
|
| | | | | | | | | | | | | | | |
| Three Months Ended | | Six Months Ended |
| June 30, | | June 30, |
(in thousands) | 2018 | | 2017 | | 2018 | | 2017 |
Cumulative credit loss at beginning of period | $ | (6,489 | ) | | $ | (5,606 | ) | | $ | (6,395 | ) | | $ | (5,606 | ) |
Additions: | | | | | | | |
Other-than-temporary impairments not previously recognized | (85 | ) | | (429 | ) | | (85 | ) | | (429 | ) |
Increases related to other-than-temporary impairments on securities with previously recognized other-than-temporary impairments | (89 | ) | | — |
| | (183 | ) | | — |
|
Reductions: | | | | | | | |
Decreases related to other-than-temporary impairments on securities paid down | — |
| | — |
| | — |
| | — |
|
Decreases related to other-than-temporary impairments on securities sold | — |
| | — |
| | — |
| | — | |